Surface Transforms Plc Registered number 03769702 Annual Report and Financial Statements for the year ended 31 May 2017 Contents for the year ending 31 March 2008 Highlights Chairman’s Statement Strategic Report Directors’ Report Report on Directors’ Remuneration Statement of Directors’ Responsibilities Independent Auditor’s Report Statement of Total Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Company Information and Advisers Notice of Annual General Meeting 2 3 5 9 12 14 15 17 18 19 20 21 39 40 Annual Report and Financial Statements 2017 1 Highlights for the year ended 31 May 2016 l l Trading and cash in line with June 2017 trading update Revenues decreased by £660k to £702k (2016: £1,362k) due to a deferral to the 2017-18 financial year as a result of a conscious decision to switch capacity from revenue generating product to test parts during the factory move l Knowsley factory move now fully completed l Successful equity placing and open offer raised gross proceeds of £3.677m to further the Company’s expansion plans post the financial year-end. Except for the ceramic furnaces, all new capital equipment has been ordered and is being progressively commissioned for increased production capacity l Gross margin percentage increased to 61.0% (2016: 51.6%) l l l l LBITDA (including tax credits and excluding share based payments) loss of £1,944k (2016: loss of £640k) Increased research costs of £1,916k (2016: £1,254k) Loss before taxation of £2,528k (2016: loss of £1,154k) Loss per share at 2.41p (2016: loss per share of 1.44p) l Cash used in operating activities increased by 34.2% to £1,220k (2016: £909k) l Cash position as at 31 May 2017 of £1,532k (2016: £4,777k) l Nominated as the tier 2 brake disc supplier on the Aston Martin Valkyrie l Continuing progress with other automotive Original Equipment Manufacturers (OEMs) albeit with certain programme delays, outside the Company’s control l Continuing delay on the formal sign off in the aerospace contract despite completion of testing 2 Surface Transforms Plc Annual Report and Financial Statements 2016 2 Chairman’s Statement for the year ended 31 May 2016 The Company continues to progress its transformation from an early stage developer to a mainstream, profitable, volume automotive components supplier. A comprehensive update on financial and operational progress was provided in the Company’s recent fundraising circular to shareholders dated 6 July 2017 and this remains unchanged; solid progress was made operationally in the year, including the contract win of the Aston Martin Valkyrie brake disc, a £1m programme, and the Company’s first mainstream contract. Whilst progress was made on some of the other target automotive OEM contracts, there are programme delays, outside the Company’s control. In addition, the biggest short-term impact is the delay in the aerospace contract, originally planned to commence in January 2018 with sales of £1.5m per year. As a result, following the financial year end, the Company successfully sought further funding, raising £3.677m, (before fees) which will provide sufficient cash to properly exploit the Company’s current commercial opportunities, both for capital expenditure and general working capital purposes. The Directors wish to thank the shareholders for their support in this fund raising. Operational progress Knowsley facility: The previously notified problem with the gas supply has been resolved although this distraction did result in certain production delays. However, the Company is now in full production, on all processes, at Knowsley. The new site, (five times the size of the old site) has been designed using “lean manufacturing” principles and is now, after initial start- up problems, performing better than the old site. The Company fully vacated its old Ellesmere Port facility on 30 April 2017. The current capacity of the new site is sales of £4m per annum in two cells: Small Volume Automotive Production providing £2.5m and Aerospace providing £1.5m. When the current investment programme is complete, total capacity is expected to be £16m per annum, although given the site’s floor space £50m sales per annum could be achieved, albeit this would require additional capital expenditure. This £50m sales target reflects the pipeline of the current customer discussions. VDA 6.3: All German customers require this quality standard. At the Company’s request, OEM 3 completed a “potential survey analysis” in the year aimed at evaluating progress and calibrating the Company’s perception on the closeout actions needed before final approval of VDA 6.3. The survey achieved this objective and the customer confirmed Surface Transforms is close to being approved. An action list with a relatively small number of items has been agreed and management expect to address these, prior to the next audit in November 2018, this date being a slight delay from previously notified September- reflecting diary availability from the customers audit team. New capital equipment: With the exception of the ceramic furnaces the new equipment is on order at prices broadly in line with budget. Delivery of the new equipment started in June 2017, with further furnace deliveries expected over the next six months. This represents a three months delay from the original plan but does not impact any internal or customer critical path milestones. Production cost reductions: The Phase One cost reductions were always in two parts, those associated with detailed engineering changes and those associated with the new equipment. The former is now almost complete; the latter are on target for completion as the new equipment is delivered. Additionally, further cost reductions have been identified from both the establishment of a Combined Heat and Power Plant on the new site and increased purchasing power on gas supplies. Grants and loans: At 31 May 2017, the Company had expended £2.3m of its capital expenditure and thus triggered the final release clause on the £500k grant and loans. £382k has now been received in the financial year, a further £78k was received in June and the outstanding balance of £40k is expected before the closing receipt date of November 2017. Progress with potential OEM customers German OEM 3: This customer is now expected to introduce the Company’s products earlier than anticipated – now in 2018 – albeit on a limited edition racetrack only car. Contractual details are in final discussion, and one relatively straightforward regulatory approval test remains to be completed (note: the Company has already passed this particular test on other cars for OEM 3, as well as many other customers). Revenues from this car are expected to be circa £500k during a race season – that typically runs from March to October. The customer is able to accelerate this introduction because the product requirements are different for track cars than road cars. The Board considers this decision further validates the customer’s confidence in the core Surface Transforms product. 3 Surface Transforms Plc Annual Report and Financial Statements 2017 3 Chairman’s Statement for the year ended 31 May 2016 In respect to the road car, the Company and the customer are now planning a revised introduction route to the previously announced mainstream, volume, vehicle range. The vehicle range is unchanged but the introduction variant is different to and later than previously announced. This has the effect of giving the Company a further six months to complete and replicate the outstanding product testing which moves volume revenues (excluding race car) back twelve months. However, as this is solely a different entry point to the same model range it does not impact medium term sales. Testing to meet the product requirements is ongoing and the Company believes it can meet the customer’s requirements in the near future. However, the Company and customer have agreed that Surface Transforms needs to replicate these results and this could take until the end of the calendar year – consistent with the new road car nomination date. British OEM 2 and German OEM 4: OEMs 2, 3 and 4 are sister companies in the same group. German OEM 3 has re-iterated that their testing programme covers the requirements of other group companies. Completion of product testing with OEM 3 will therefore complete testing for OEMs 2 and 4. German OEM 5: This is a different German automotive group. The customer’s testing is going well; they have slightly different test requirements to German OEM 3 although the Company believes that it can also meet these. The customer has re-iterated the target model with a 2019 start of production date with mature run rate volumes of £2.5m per year. British OEM 6: In the year, the Company won an order with Aston Martin – now described as OEM 6. Engineering work on the Aston Martin order continues to plan and the launch date of January 2019 is unchanged with development revenues for the Company expected before that date. British OEM 1: Delay with the first model for OEM 1 is understood to be due to challenges they are having integrating their brake system and unrelated to the discs. The customer’s solution appears to have been to ask the Company’s competitor for a holistic caliper and disc system offering. As a result, this latter project has been deleted from the Company’s internal forecasts and replaced by Aston Martin. The net effect of these changes is minimal. The Company continues to include the second model for OEM 1 in its planning as it will be offering a joint caliper, disc and pad solution to the OEM, replicating the success of Aston Martin. Aerospace: As previously reported, testing has been completed and the only outstanding issue is formal sign off by US Naval Air Command and the aeroplane manufacturer. However, this “sign off” continues to be delayed, for reasons the Board now knows to be the result of the aeroplane customer wanting to “package” a number of changes at the same time. The Company is in continuing discussions with its landing gear customer with regard to the financial implications of this airframe delay, as the launch date was a fundamental feature of the original commercial agreement. These discussions include continuance of development income if production income is delayed for reasons within the customer’s responsibility. The discussions are constructive but, as yet, without resolution. Impact on the business plan in future years: The new race track business is a welcome short term boost to revenues but as previously announced the uncertainty over aerospace revenues and the later starting date for the OEM 3 road car could potentially delay total planned revenues by a year, each year, for the period to financial year 2020/21 returning to the previous notified run rate thereafter. David Bundred Chairman 18 September 2017 4 Surface Transforms Plc Annual Report and Financial Statements 2016 4 Strategic Report for the year ended 31 May 2016 Operational review and principal activity Surface Transforms is a UK based developer and manufacturer of carbon ceramic products for the brakes market. In these industries our products are lightweight, extremely durable and highly refined. They offer better heat dissipation and material strength; resulting in superior wear life, improved brake pad wear life and weight reduction compared to our competitor’s carbon ceramic products in the automotive industry and for the aerospace industry they offer weight reduction, improved brake performance and superior wear life. Our strategy is to be a profitable, series production supplier of carbon ceramic brake discs to the large volume original equipment manufacturer (OEM) automotive market and to niche military and small commercial aircraft brake market. To achieve this, we work closely with Tier 1 suppliers and directly with OEMs to meet their requirements on product, price, quality and security of supply. In addition, we supply carbon ceramic brake discs to small volume vehicle manufacturing and retrofit high performance kits for performance cars. The key features of our business model are as follows: l l Engineer and manufacture carbon ceramic brake products, which deliver high technical performance for the luxury and performance brakes markets, which we estimate to be, ultimately, a £2 billion per annum market Be a ‘Quality Company’ with a culture which lives and breathes its world class business processes and management systems. We surpass the automotive and aerospace quality standards (TS16949 and AS9100); and through continuous improvement, work to comply with the German automotive industry quality standard (VDA 6.3) l Operate lean manufacturing processes, enabling the Company to have a highly competitive low cost manufacturing route making our products price competitive with good margins l l Support and manage our supply chain which is then capable of delivering to our customers’ requirements on product, price, quality and security of supply Build manufacturing capacity. Initially to 20,000 discs/annum (equivalent to circa £16 million revenue) which is further expandable, with capital expenditure, to 100,000 discs/annum. Succeeding in these activities generates highly desirable, world leading quality products, which are price competitive and profitable to the business. Furthermore, our products and processes are protected by a high level of intellectual property through a combination of patents and mainly Company process knowhow. Delivering our objectives: Niche vehicle and Retrofit Niche vehicle and retrofit customers make up a relatively small addressable market of circa £1m-£2m per annum. Sales in these markets continue. Existing niche vehicle customers have been maintained and we saw growth with new customers added, principally Singer vehicles and Next EV. As previously stated we do not plan to allocate engineering time to generating new kits as these resources are focused on supporting the automotive game changing programmes; however, we continue to sell existing kits for Porsche, Nissan GTR, Aston Martin and Ferrari. In terms of sales during the year both niche vehicle manufacturers and retrofit distributors finished the year with sales backlogs. The cause of this backlog was due to manufacturing capacity being prioritised during the factory move to support the large, strategically important OEM programmes in the luxury and performance automotive brakes market. With the factory move complete and the new factory’s small volume production (SVP) cell fully operational these backlogs will be cleared during 2017. The SVP’s automotive capacity is £2.5m and therefore is now capable of supporting niche vehicle manufacturers and retrofit customer demands going forward. 5 Surface Transforms Plc Annual Report and Financial Statements 2017 5 Strategic Report for the year ended 31 May 2016 Automotive OEMs In addition to the niche customers we have made significant progress on large automotive OEM objectives: l Product – we continue to support all our target OEM programmes. Product design work has progressed well with OEM 6 (Aston Martin) and product testing with OEM 5 has been very encouraging. A significant amount of work has been completed to progress the product in terms of the environmental requirements of German OEM 3. A test method and test house has been verified to accelerate the testing. The test is a lengthy, destructive test and we have been able to define and understand the failure mechanism during the test. This work has enabled a number of product enhancements to be made and a full suite of statistical results is expected to be available by the end of the calendar year. l Quality – the Company was successful in re-certifying the new site to TS 16949 and AS 9100 standards, the certifications could not be simply “carried over” from the previous Ellesmere Port site. Although these certifications are important; our efforts are focused on complying with the German automotive industry quality standard (VDA 6.3) which allows the Company to attain high levels of process control and operational efficiency. These are key capabilities to managing series volume supply risks and ensure the Company is competitive in the market place. l Supply chain security – as with any manufacturing process we are only as good as our supply chain. Our analysis of the supply chain identified a number of weaknesses that we have been addressing during the year. We are pleased with progress made and in particular believe the major supply chain risks identified will be resolved during 2017. l Manufacturing capability, capacity and cost – our new factory has significantly enhanced our manufacturing capabilities with further additional improvement being implemented. Our capacity expansion plans continue broadly as planned. The programme to reduce the cost to manufacture as mentioned in the chairman’s statement will be completed with the introduction of additional capacity and although there have also been cost increases arising from currency movements on imported materials and sub(cid:0)contracted processes we expect these will be more than offset as processes are brought in house. Aircraft brakes Despite the delays we continue to work with an international aircraft brake system supplier on an exclusive basis and are supporting our customer’s approval processes for the US military programme. Discussions around mitigating delays and support to the supply chain during the approval process are on going. There has been large investment in engineering work during the year to support the progress made on product refinement, quality, supply chain and capacity improvement. The demand for this work is clear from our game changing programmes and will be continued during the coming year. Financial review In the year ended 31 May 2017, revenues were £700k (2016: £1.362k). This reduction in revenue did not reflect underlying order intake as during the period of limited capacity (the factory move) management took the decision to switch saleable parts into test parts for the extended OEM 3 test programme. These sales have not been lost, total firm orders and customer commitments are for sales of £889k in the new financial year (2016: £427k), the highest visibility of future sales the Company has ever had. Gross margin improved during the year to 61.0% (2016: 51.6%) due to an improved sales mix of more products at a higher gross margin compared to prior year. Research and development costs increased to £1.916m (2016: £1.254m) as a result of the increased testing on the OEM 3 programme. Losses after taxation increased by 156.1% to £2,172k (2016: £848k) reflecting the reduced gross profit of £275k on the reduction in sales, increased R&D costs of £662k.and increased general overheads of £319k, the latter mostly reflecting both the on-going additional costs of the larger new site and £72k of non – recurring costs from the move which were not capitalised. 6 Surface Transforms Plc Annual Report and Financial Statements 2017 6 Strategic Report for the year ended 31 May 2016 At 31 May 2017, inventory was £507k (2016: £570k). This modest decrease reflects the initial unwinding of the 31 May 2016 inventory increase in advance of the factory move, but, in the opinion of the Directors, is still too high relative to current sales. Net cash used in operating activities increased by 34.2% to £1,220k from £909k in the prior year, mainly due to increased losses after tax, offset by R&D tax credit received of £356k. The Company had a cash balance of £1,532k at 31 May 2017 (2016: £4,777k). In addition, an expected R&D tax credit of over £450k (receivable in December 2017) and claimed but not yet received grants of £118k (of which £80k was received in June) should be due to the Company. Except for the ceramic furnaces, all the new equipment is on order, with deposits made at prices broadly in line with budget. The Company is pleased to report that it raised £3.677m (before fees) in an equity fund raising post the year-end and the strong support shown by existing shareholders. Loss per share was 2.41 pence (2016: loss 1.44 pence). Key performance indicators The Directors continue to monitor the business internally with a number of performance indicators: order intake, sales output, profitability, supply chain capacity, health and safety, quality and manufacturing cost of automotive discs. A set of business milestones is also updated and reviewed as part of the monthly board meeting. The Company produces an annual business plan and full monthly forecasts detailing sales, profitability and cash flow to help monitor business performance going forward. These are detailed in the Financial Review above. Management meetings are held on a weekly basis, all senior managers attend and discuss production, engineering, financial and quality issues. Risks and uncertainties As in previous years the principal risk faced by the Company is considered to be the speed at which our customers and potential customers adopt the new carbon ceramic product technology. Indications are that there is a strengthening desire from our strategic aerospace partner and from a number of volume automotive OEMs to incorporate the Company’s product in their respective platforms. This risk is constantly assessed by regular customer review meetings. The risks associated with bringing the newly purchased furnaces into production are being managed by both a project team that has the experience and skills to deliver this type of project as well as pre-delivery testing at the supplier’s premises. Regular weekly and monthly reviews are held and the project’s progress is communicated across the entire company on a regular basis. In terms of uncertainties, although sales are expected to be flat in the retrofit market, product sales are still expected to grow, modestly in the niche vehicle market. This uncertainty is constantly assessed by regular customer meetings and monitoring the level of enquiries and orders for both the Company’s products and industry wide. In addition, the Company faces the continued uncertainty created by the global economic and political climate. This changing landscape is constantly assessed and reviewed by both the management team and the board of directors. In summary, the Company has seen significant progress in its automotive ‘game changing’ projects and is progressing well with its expansion plans. Further progress on automotive ‘game changers’ is expected during the remainder of 2017 and 2018. Please refer to note 21 for information on financial risk management and exposure. Directors and staff We would like to thank all our colleagues, management and staff alike, for their hard work and dedication over the past year. 7 Surface Transforms Plc Annual Report and Financial Statements 2017 7 Strategic Report for the year ended 31 May 2016 Outlook The Company expects sales in the financial year 2017-18 to be greater than that of 2016-17 as the numbers will include the approximately £400k of sales switched from last year into the current financial year. Additionally, the Directors expect to see development income from the Aston Martin Valkyrie contract and continuing modest growth in the near OEM market. Development costs will continue at the current higher level. Thereafter the Board is confident of delivering substantial sales growth and expects to make further announcements during the year. As noted above when the current capacity expansion programme is complete, in 2018, the Company will have capacity for 20,000 discs facilitating overall sales capacity of approximately £16m. The Company’s board and management is looking forward to the challenges and opportunities of the next years with confidence and excitement. David Bundred Chairman 18 September 2017 Kevin Johnson Chief Executive 8 Surface Transforms Plc Annual Report and Financial Statements 2014 8 Directors’ Report for the year ended 31 May 2016 The Directors present their annual report and the audited financial statements for the year ended 31 May 2017. Directors and Directors’ interests The Directors who held office during the year and to the date of signature of the financial statements were as follows: D Bundred* (Chairman) Dr K Johnson (Chief Executive) K D’Silva* RD Gledhill* *denotes non-executive Director. The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company according to the register of Directors’ interests: K D’Silva RD Gledhill Dr K Johnson D Bundred % of issued share capital at end of year Number of £0.01 ordinary shares Interest at start of year Interest at end of year 1.07% 13.09% 0.14% 0.81% 15.11% 970,818 11,818,853 124,000 733,341 920,818 11,818,853 124,000 733,341 According to the register of Directors’ interests, no rights to subscribe for shares in or debentures of the Company were granted to any of the Directors or their immediate families, or exercised by them during the financial year, except as disclosed in the report on Directors’ remuneration on pages 12 and 13. The Directors benefited from qualifying third party indemnity provisions in place during the financial year and at the date of this report. Substantial shareholders In addition to the Directors’ interests noted above, the Directors are aware of the following who were interested in 3% or more of the Company’s equity as at 31 May 2017: Registered holding Hargreave Hale Unicorn Asset Management Barclays Wealth Hargreaves Lansdown Asset Management Maunby Investment Manager Number of ordinary shares % of issued share capital 14,295,281 9,375,000 3,481,313 2,831,176 2,797,211 15.83% 10.38% 3.85% 3.13% 3.10% 9 Surface Transforms Plc Annual Report and Financial Statements 2017 9 Directors’ Report for the year ended 31 May 2016 Corporate governance The Directors recognise the importance of sound corporate governance and confirm that although compliance with the UK Corporate Governance Code is not compulsory for AIM listed companies, the Company is following the guidelines of the QCA Corporate Governance Code (as devised by the QCA in consultation with a number of significant institutional small company investors) to the extent appropriate and practical for a Company of its nature and size. The Board has appointed an Audit Committee whose primary role is to review the Company’s interim and annual financial statements before submission to the Board for approval. The Board has also appointed a Remuneration Committee, which is responsible for reviewing executive remuneration and performance. The Remuneration Committee is made up of three non-executive Directors, David Bundred, Kevin D’Silva and Richard Gledhill. The Audit Committee is made up of the same three non-executive Directors. Details of the Remuneration Committee are disclosed in the report on Directors’ remuneration on pages 12 and 13. Going concern The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate. The Company incurred a net loss of £2,172k during the year however the Directors are satisfied, based on detailed cash flow projections, noting the post balance sheet fund raising of £3.677m and after the consideration of reasonable sensitivities, that sufficient cash is available to meet the Company’s needs as they fall due for the foreseeable future and for at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the Company’s annual budget, prepared and approved by the Board, which reflects a number of key assumptions including; revenue growth, underpinned by current pipeline; customer compliance with payment terms; other receipts of a value and timing consistent with previous years. Revenues are expected to continue in the forthcoming year. Further information regarding the Company’s business activities, together with the factors likely to affect future development, performance and position are set out in the Chairman’s statement on pages 3 and 4 and the Strategic report on pages 5 to 8. In addition, note 21 to the financial statements includes the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and its exposures to credit risk and liquidity risk. The Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Principal activity The principal activity of the Company is to design, manufacture and sell carbon fibre components. The majority of the Company’s staff are employed in research activities which are concentrated on the ongoing identification of new products and applications for carbon fibre reinforced ceramic friction and non-friction materials. Result for the year and proposed dividend The loss for the year after taxation amounted to £2,172k (2016: £848k). The Directors do not recommend the payment of a dividend (2016: £nil). Disclosure of information to auditor The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. 10 Surface Transforms Plc Annual Report and Financial Statements 2017 10 Directors’ Report for the year ended 31 May 2016 Strategic report The information required by schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 has been included in the separate Strategic Report in accordance with section 414C(11) of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Post balance sheet event On 9 August 2017, post balance sheet date, the Company announced that it had been successful in raising £3.677m gross of expenses through issuing 23,725,481 shares at a price of 15.5p. Auditor RSM UK Audit LLP has indicated its willingness to continue in office. Ordinary resolutions to re-appoint RSM UK Audit LLP as auditor and to authorise the directors to agree their audit fee, will be proposed at the forthcoming annual general meeting. By order of the board D Bundred Chairman 18 September 2017 Image Business Park Acornfield Road Liverpool L33 7UF 11 Surface Transforms Plc Annual Report and Financial Statements 2017 11 Report on Directors’ Remuneration for the year ended 31 May 2016 Policy on executive Directors’ remuneration The Remuneration Committee comprises of David Bundred, Kevin D’Silva and Richard Gledhill. The Remuneration Committee is responsible for reviewing and determining the Company’s policy on executive remuneration (including the grant of options under the Share Option Scheme). Executive remuneration packages are designed to ensure the Company’s executive Directors and senior executives are fairly rewarded for their individual contributions to the Company. Fees for non-executive Directors The fees for non-executive Directors are determined by the Board. The non-executive Directors are not involved in the decisions about their own remuneration. Directors’ remuneration Set out below is a summary of the fees and emoluments received by all Directors for the year or, where applicable, period of office: Executive directors Dr K Johnson Non-executive directors K D’Silva RD Gledhill D Bundred Salary £ 163,183 163,183 18,401 14,282 7,875 40,558 203,741 Fees £ – – – 4,500 19,125 23,625 23,625 2017 £ Salary £ 163,183 104,764 163,183 104,764 18,401 18,782 27,000 64,183 16,550 – – 16,550 227,366 121,314 Fees £ – – – 18,000 27,000 45,000 45,000 2016 £ 104,764 104,764 16,550 18,000 27,000 61,550 166,314 With the exception of Dr K Johnson, none of the Directors received pension contributions in respect of their office. In addition to the emoluments received, as stated above, Dr K Johnson received £9,424 (2016: £9,424) in respect of pension contributions. Directors’ interests Details of any contracts in which a Director has a material interest are disclosed in note 19. None of the Directors received any remuneration or benefits under long term incentive schemes. 12 Surface Transforms Plc Annual Report and Financial Statements 2017 12 Report on Directors’ Remuneration for the year ended 31 May 2016 Share options The Company operates a share incentive scheme. All options are granted at the discretion of the Board. The number of options granted, date of grant, exercise price and exercise periods under the scheme are set out below. None of the Directors exercised options during the year. Directors’ options outstanding and the options which were granted, surrendered and expired during the year are as follows: Director Dr K Johnson Dr K Johnson Dr K Johnson Dr K Johnson Dr K Johnson KA D’Silva D Bundred D Bundred D Bundred Dr K Johnson D Bundred Date of Grant 18/04/2007 30/06/2008 22/09/2008 01/03/2010 15/02/2012 17/04/2007 17/10/2011 17/10/2011 17/10/2011 30/09/2016 02/10/2016 Holding on Exercised during the year 1 June 2016 Number of Share options expired, waived or lapsed Holding on 31 May Exercise Price 2017 Exercise Period Expiry Date 100,000 288,000 481,707 345,000 330,000 50,000 100,000 100,000 100,000 600,000 250,000 – (100,000) – – – – – – – – – (50,000) – – – – – – – – – – – 288,000 481,707 345,000 330,000 – 100,000 100,000 100,000 600,000 250,000 £0.21 £0.18 £0.19 £0.09 £0.12 £0.21 £0.09 £0.09 £0.09 £0.145 £0.155 18/04/10-18/04/17 30/06/11-30/06/18 22/09/11-22/09/18 01/03/13-01/03/20 15/02/15-15/02/22 17/04/10-17/04/17 17/10/14-17/10/21 17/10/14-17/10/21 17/10/14-17/10/21 30/09/18-30/09/25 02/10/18-02/10/25 18/04/17 30/06/18 22/09/18 01/03/20 15/02/22 17/04/17 17/10/21 17/10/21 17/10/21 30/09/25 02/10/25 2,744,707 (50,000) (100,000) 2,594,707 The market price of the shares at 31 May 2017 was 19.50 pence and during the year varied from 28.50 pence to 17.10 pence. By order of the board D Bundred Chairman 18 September 2017 Image Business Park Acornfield Road Liverpool L33 7UF 13 Surface Transforms Plc Annual Report and Financial Statements 2017 13 Statement of Directors’ Responsibilities for the year ended 31 May 2016 The directors are responsible for preparing the Strategic Report and the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements of the company in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). The financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position and performance of the company. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the financial statements, the directors are required to: (a) select suitable accounting policies and then apply them consistently; (b) make judgements and accounting estimates that are reasonable and prudent; (c) state whether they have been prepared in accordance with IFRS as adopted by the EU; and (d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Surface Transforms Plc website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 14 Surface Transforms Plc Annual Report and Financial Statements 2017 14 Independent Auditor’s Report to the members of Surface Transforms Plc Opinion on financial statements We have audited the group and parent company financial statements (“the financial statements”) on pages 17 to 38. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: l l l l the financial statements give a true and fair view of the state of the group’s and the parent’s affairs as at 31 May 2017 and of the group’s loss for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at http://www.frc.org.uk/auditscopeukprivate. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements and, based on the work undertaken in the course of our audit, the Strategic report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: l l l adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or l we have not received all the information and explanations we require for our audit. 15 Surface Transforms Plc Annual Report and Financial Statements 2017 15 Independent Auditor’s Report to the members of Surface Transforms Plc Respective responsibilities of Directors and auditor As more fully explained in the Directors’ Responsibilities Statement set out on page 14, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Graham Bond FCA (Senior Statutory Auditor) for and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants 20 Chapel Street Liverpool L3 9AG 18 September 2017 16 Surface Transforms Plc Annual Report and Financial Statements 2017 16 Statement of Total Comprehensive Income for the year ended 31 May 2017 Revenue Cost of sales Gross profit Administrative expenses: Before research and development costs Research and development costs Total administrative expenses Other operating income Operating loss Financial income Financial expenses Loss before tax Taxation Loss for the year after tax Other comprehensive income Total comprehensive loss for the year attributable to members Loss per ordinary share Basic and diluted All amounts relate to continuing activities. Note 3 4 6 7 8 17 2017 £’000 702 (274) 428 (1,045) (1,916) (2,961) – (2,533) 5 – (2,528) 356 (2,172) – (2,172) 2016 £’000 1,362 (659) 703 (654) (1,254) (1,908) 84 (1,121) 2 (35) (1,154) 306 (848) – (848) 20 (2.41p) (1.44p) The notes on pages 21 to 38 form part of these financial statements. 17 Surface Transforms Plc Annual Report and Financial Statements 2017 17 Statement of Financial Position at 31 May 2017 Non-current assets Property, plant and equipment Intangibles Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Other interest bearing loans and borrowings Trade and other payables Non-current liabilities Other interest bearing loans and borrowings Total liabilities Net assets Equity Share capital Share premium Capital reserve Retained loss Total equity attributable to equity shareholders of the Company Note 9 10 11 12 13 14 13 16 17 17 17 2017 £’000 2,415 136 507 365 1,532 (12) (685) (697) (352) 2017 £’000 2,551 2,404 4,955 (1,049) 3,906 903 14,390 464 (11,851) 3,906 2016 £’000 627 – 570 939 4,777 (4) (936) (940) (16) 2016 £’000 627 6,286 6,913 (956) 5,957 901 14,359 464 (9,767) 5,957 These financial statements were approved by the board of Directors on 18 September 2017 and were signed on its behalf by: D Bundred Chairman Dr K Johnson Director Company Registered Number 03769702 The notes on pages 21 to 38 form part of these financial statements. 18 Surface Transforms Plc Annual Report and Financial Statements 2017 18 Statement of Changes in Equity for the year ended 31 May 2017 For the year to 31 May 2016 Balance at 31 May 2015 Comprehensive income for the year Loss for the year Total comprehensive income for the year Transactions with owners, recorded directly to equity Shares issued in the year Cost of issue written off to share premium Equity settled share based payment transactions Total contributions by and distributions to the owners Balance at 31 May 2016 For the year to 31 May 2017 Share capital £’000 532 – – 369 – – 369 901 Share capital £’000 Share premium account £’000 9,186 – – 5,531 (358) – 5,173 14,359 Share premium account £’000 Capital reserve £’000 Retained loss £’000 464 (8,983) – – – – – – (848) (848) – – 64 64 464 (9,767) Capital reserve £’000 Retained loss £’000 Balance at 31 May 2016 901 14,359 464 (9,767) Total £’000 1,199 (848) (848) 5,900 (358) 64 5,606 5,957 Total £’000 5,957 Comprehensive income for the year Loss for the year Total comprehensive income for the year Transactions with owners, recorded directly to equity Shares issued in the year Equity settled share based payments Total contributions by and distributions to the owners – – 2 – 2 – – 31 – 31 – – – – – Balance at 31 May 2017 903 14,390 464 (11,851) (2,172) (2,172) (2,172) (2,172) – 88 88 33 88 121 3,906 The notes on pages 21 to 38 form part of these financial statements. 19 Surface Transforms Plc Annual Report and Financial Statements 2017 19 Statement of Cash Flows for the year ended 31 May 2017 Cash flows from operating activities Loss after tax for the year Adjusted for: Profit on disposal of property plant and equipment Depreciation and amortisation charge Equity settled share-based payment expenses Financial expense Financial income Taxation Changes in working capital Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables Increase in trade and other payables Taxation received Net cash used in operating activities Cash flows from investing activities Acquisition of tangible and intangible assets Proceeds from disposal of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital, net of expenses Payment of finance lease liabilities Interest paid Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 2017 £’000 (2,172) – 145 88 – (5) (356) (2,300) 63 579 82 (1,576) 356 (1,220) (2,075) 27 (2,048) 33 (10) – 23 (3,245) 4,777 1,532 2016 £’000 (848) (16) 111 64 35 (2) (306) (962) (253) (572) 572 (1,215) 306 (909) (265) 26 (239) 5,142 (11) (35) 5,096 3,948 829 4,777 The notes on pages 21 to 38 form part of these financial statements. 20 Surface Transforms Plc Annual Report and Financial Statements 2017 20 Notes to the Financial Statements for the year ended 31 May 2017 1 Accounting policies Surface Transforms Plc (the Company) incorporated and domiciled in the UK, the functional currency being sterling. The financial statements have been presented in sterling and rounded to the nearest thousand. The registered office of business is Image Business Park, Acornfield Road, Liverpool L33 7UF. Surface Transforms is a UK-based developer and manufacturer of carbon ceramic products for the brakes market. Surface Transforms Plc has four dormant subsidiary companies that are excluded from these financial statements on the basis of materiality and that they do not currently trade. These are; ST Aerospace Ltd., ST Automotive Ceramic Ltd., ST Defence Ltd and ST Racing Ltd. Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU. The financial statements were approved by the board on 18 September 2017. Basis of preparation The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost convention. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Going concern The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate. The Company incurred a net loss of £2,172k during the year however the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient cash is available to meet the Company’s needs as they fall due for the foreseeable future and at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the company’s annual budget, prepared and approved by the Board, which reflects a number of key assumptions including; revenue growth, underpinned by current pipeline; customer compliance with payment terms; other receipts of a value and timing consistent with previous years. Further information regarding the Company’s business activities, together with the factors likely to affect future development, performance and position are set out in the Chairman’s statement on pages 3 and 4 and the Strategic report on pages 5 to 8. In addition, note 21 to the financial statements includes the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and its exposures to credit risk and liquidity risk. The Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. A view which was reinforced by the post year end fund raising of £3.677m before fees. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Share based payments The share option programme allows employees to acquire shares of the Company. The fair value is measured at grant date and spread over the period during which the employees and Directors become unconditionally entitled to the options. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that are expected to vest except where forfeiture is only due to share prices not achieving the threshold for vesting. 21 Surface Transforms Plc Annual Report and Financial Statements 2017 21 Notes to the Financial Statements for the year ended 31 May 2017 1 Accounting policies continued Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Leases in which the Company assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses. Payments are accounted for as described below. Depreciation is charged to the statement of total comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: l l l Plant and machinery Fixtures and fittings Leasehold improvements 12.5% per annum 33.3% per annum Over life of lease Depreciation methods and useful lives are reviewed at each balance sheet date, residual values are deemed to be nil, no depreciation is charged on capital in progress. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the foreign exchange rate ruling at the balance sheet date. The gains or losses on retranslation are included in the income statement. Leases Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Government grants Revenue grants are credited to deferred income and credited to the statement of total comprehensive income, deferred over the life of the asset to which it refers. Post-retirement benefits The Company operates a workplace pension scheme, and contributes to specific employees’ personal pension schemes. The amount charged to the profit and loss account represents the contributions payable to employees personal pension schemes and workplace pensions during the accounting year. Reserves Share capital Incremental costs directly attributable to the issue of Ordinary shares. Share premium This reserve records the amount above the nominal value received for shares issued, less transaction costs. Capital reserve This reserve records the nominal value of shares repurchased by the company. 22 Surface Transforms Plc Annual Report and Financial Statements 2017 22 Notes to the Financial Statements for the year ended 31 May 2017 1 Accounting policies continued Research and development expenditure Expenditure on research activities is recognised in the statement of total comprehensive income as an expense as incurred. Expenditure arising from the Company’s development is recognised only if all of the following conditions are met and an asset is created that can be identified: l l l l l it is probable that the asset created will generate future economic benefits; the development cost of the asset can be measured reliably; the Company has the intention to complete the asset and the ability and intention to use or sell it; the product or process is technically and commercially feasible; and sufficient resources are available to complete the development and to either sell or use the asset. Expenditure is only capitalised if there is a high probability by the customer for the programme to proceed to full scale commercial sales. This would normally be reflected in a firm purchase order and/or production contract, and a decision by their Board that the underlying car programme will go into production. Where these criteria have not been achieved, development expenditure is recognised as an expense in the statement of total comprehensive income in the period in which it is incurred. Inventories Inventories are stated at the lower of cost and net realisable value. In determining the cost of raw materials and consumables the purchase price is used. For work in progress, cost is taken as production cost. Taxation The charge for taxation is based on the loss for the year and takes into account taxation deferred or accelerated arising from temporary differences between the carrying amounts of certain items for taxation and for accounting purposes. Deferred taxation is provided for in full at the tax rate which is expected to apply to the period when the deferred taxation is expected to be realised, including on tax losses carried forward. Deferred taxation assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Research and development tax credits, which are typically received in the Autumn, are recognised on a cash received basis as a reduction in the current tax payable as this is when the tax credit is considered recoverable as the associated uncertainties have been eliminated. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits held on call with banks, and other short term highly liquid investments with original maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Revenue Revenue comprises income derived from the supply of carbon fibre materials during the course of the year. Revenue is recognised on transfer to the customer of significant risks and rewards of ownership, generally this will be when goods are despatched to the customer. Turnover excludes value added taxes. Segmental reporting The Board has reviewed the requirements of IFRS 8 “Operating Segments”, including consideration of what results and information the Chief Executive (the Chief Operating Decision Maker) reviews regularly to assess performance and allocate resources, and concluded that all revenue falls under a single business segment. The Directors consider the business does not have separate divisional segments as defined under IFRS 8. The Chief Executive assesses the commercial performance of the business based upon a single set of revenues, margins, operating costs and assets. 23 Surface Transforms Plc Annual Report and Financial Statements 2017 23 Notes to the Financial Statements for the year ended 31 May 2017 1 Accounting policies continued Non-derivative financial instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents and trade and other payables. Government grants The grants are recognised as income over the period necessary to match them with related costs i.e. over the life of the asset to which they refer. Critical accounting estimates and judgements The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not already apparent from other sources. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to carrying amount of assets and liabilities within the next financial year are discussed below: Impairment of property, plant and equipment Property, plant and equipment are reviewed annually for impairment if events or changes in circumstances, such as changes in technology, indicate that the carrying amount of an asset is not recoverable. The directors judge that no impairment is required as the Company is still at the pre commercialisation phase of the technology exploitation. Research and development expenditure The Board considers the definitions of research and development costs as outlined in IAS 38: Intangible Assets when determining the correct treatment of costs incurred. Where such expenditure is technically and commercially feasible, the Company intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Company can measure reliably the expenditure attributable to the intangible asset it is treated as development expenditure and capitalised on the statement of financial position. In considering whether an item of expenditure meets these criteria, the Board applies judgement. During the year all such expenditure has been expensed to the statement of total comprehensive income on the grounds that it relates to feasibility studies to identify new applications for the technology or methods of improving the production process. As the technical feasibility of this work is unknown at the time the costs are incurred, none meet the criteria for capitalisation during the current or previous year. Deferred tax Management judgement is required to determine the amount of tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with an assessment of the effect of future tax planning strategies. Further information regarding the level of unrecognised deferred tax is included in note 15. Going concern Management judgement is applied at each reporting date in assessing the ongoing applicability of the going concern assumption and the current year’s assessment of which has been included within the going concern section above. Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. 24 Surface Transforms Plc Annual Report and Financial Statements 2017 24 Notes to the Financial Statements for the year ended 31 May 2017 1 Accounting policies continued Non-derivative financial instruments continued Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method less any impairment losses. Interest rate risk The Company finances its operations through cash. Cash resources are invested to attract the highest rates for periods that do not limit access to these resources. Liquidity risk With regard to liquidity, the Company’s policy has throughout the year been to ensure that the Company is able at all times to meet its financial liabilities as and when they fall due. Cash flow forecasting is undertaken on a monthly basis approved and board level and managed on a daily basis by the finance function. Exchange rate risk As the Company evolves exchange rate fluctuations could have an adverse effect on the Company’s profitability or the price competitiveness of its services. There can be no assurance that the Company would be able to compensate or hedge against such adverse effects and therefore negative exchange rate movements could have a material adverse effect on the Company’s business, prospects and financial performance. New standards, amendments and interpretations issued but not effective for the financial year beginning 1 June 2017 and not early adopted The IASB and IFRIC have issued the following standards and interpretations with effective dates as noted below: Standard Key requirements Effective date IFRS 9, Financial Instruments The standard is the first standard issued as part of a wider project to replace 1 January 2018 IAS 39. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The classification depends on the entity’s business model and the contractual cash flow characteristics of the instrument. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. IFRS 15, Revenue from Contracts with Customers The standard specifies how and when a company will recognise revenue as well as requiring such entities to provider users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. 1 January 2018 IFRS 16, Leases The standard requires lessees to recognise most leases on their balance sheets, regardless of the industry the entity operates within. 1 January 2019 The Directors are currently assessing the impact of the above standards on the financial performance of the Company however are unable to fully quantify the impact of the revised standards. There are no other IFRSs or IFRIC interpretations that are not yet fully effective that would be expected to have a material impact on the Company. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 25 Surface Transforms Plc Annual Report and Financial Statements 2017 25 Notes to the Financial Statements for the year ended 31 May 2017 2 Segment reporting Due to the nature of the business the Company is currently focussed on building revenue streams from a variety of different markets. As there is only one manufacturing facility, and as this has capacity above and beyond the current levels of trade, there is no requirement to allocate resources to or discriminate between specific markets or products. As a result, the Company’s chief operating decision maker, the Chief Executive, reviews performance information for the Company as a whole and does not allocate resources based on products or markets. In addition, all products manufactured by the Company are produced using similar processes. Having considered this information in conjunction with the requirements of IFRS 8, as at the reporting date the board of Directors have concluded that the Company has only one reportable segment that being the manufacture and sale of carbon fibre materials and the development of technologies associated with this. The Company considers it offers product technology namely carbon fibre re-enforced ceramic material, which is machined into differing shapes depending on the intended purpose of the end user. Revenue by geographical destination is analysed as follows: United Kingdom Rest of Europe United States of America Rest of World 3 Expenses and auditors remuneration Operating loss is stated after charging Profit on disposal of property plant and equipment Depreciation of property, plant and equipment Amortisation of intangible assets Research costs expensed as incurred Rents payable under operating leases – land and buildings Exchange losses after crediting Government grants Auditor’s remuneration Amounts receivable by auditors and their associates in respect of: Audit of these financial statements Tax advice 2017 £’000 322 189 191 – 702 2017 £’000 – 139 6 1,916 139 15 – 2017 £’000 25 24 2016 £’000 199 835 313 15 1,362 2016 £’000 16 111 – 1,254 55 2 84 2016 £’000 23 9 Grants received comprise revenue grants from the Technology Strategy Board. These are subject to making expenditure as stipulated in the grant applications and to audit of the claims. There are no unfulfilled conditions or contingencies associated with government assistance received. 26 Surface Transforms Plc Annual Report and Financial Statements 2017 26 Notes to the Financial Statements for the year ended 31 May 2017 4 Remuneration of Directors The aggregate amount of emoluments paid to Directors in respect of qualifying services during the year was £227,366 (2016: £166,314). The amounts set out above include remuneration in respect of the highest paid director of £163,183 (2016: £104,764). Pension contributions of £9,424 (2016: £9,424) were made to a money purchase scheme on behalf of one director, no other pension contributions were accruing by any other Director during either the current or prior year. 5 Staff numbers and costs The average number of persons employed by the Company (including Directors) during the year, analysed by category, was as follows: Number of employees 2016 2017 Directors Other employees The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Other pension costs (see note 18) Share based compensation 6 Financial income Total bank interest 7 Financial expenses Total interest expense on financial liabilities measured at amortised cost 4 26 30 2017 £’000 1,024 101 24 88 1,237 2017 £’000 5 2017 £’000 – 4 25 29 2016 £’000 1,006 97 21 64 1,188 2016 £’000 2 2016 £’000 35 27 Surface Transforms Plc Annual Report and Financial Statements 2017 27 Notes to the Financial Statements for the year ended 31 May 2017 8 Taxation Analysis of credit in year UK corporation tax Adjustment in respect of prior years – R&D tax allowances Total income tax credit Details of the unrecognised deferred tax asset are included in note 15. 2017 £’000 2016 £’000 (356) (356) (306) (306) Factors affecting the tax credit for the current period The current tax credit for the year is higher than the standard rate of corporation tax in the UK of 19.00% (2016: 20.00%). The differences are explained below: Reconciliation of effective tax rate Loss for the year Total income tax credit Loss excluding income tax Current tax at average rate of 19.83% (2016: 20.00%) Effects of: Non-deductible expenses Change in unrecognised timing differences Current year losses for which no deferred tax recognised Adjustment in respect of prior years – R&D tax allowances Income tax credit (see above) 2017 £’000 (2,172) (356) (2,528) (501) 19 (3) 485 (356) (356) 2016 £’000 (848) (306) (1,154) (231) 13 18 200 (306) (306) Factors that may affect future tax charges As announced Corporation Tax, main rate for years starting 1 April 2017, 2018 and 2019 will be 19% with the government announcing a further reduction to Corporation Tax main rate for year starting 1 April 2020 at 17%. 28 Surface Transforms Plc Annual Report and Financial Statements 2017 28 Notes to the Financial Statements for the year ended 31 May 2017 9 Property, plant and equipment Leasehold improvements £’000 Plant and machinery £’000 Fixtures and fittings £’000 Capital in progress £’000 Cost At 31 May 2015 Additions Disposals At 31 May 2016 Additions Disposals At 31 May 2017 Depreciation At 31 May 2015 Charge for year Disposals At 31 May 2016 Charge for year Disposals At 31 May 2017 Net book value At 31 May 2015 At 31 May 2016 At 31 May 2017 75 10 – 85 124 – 209 59 7 – 66 9 – 75 16 19 134 858 231 (38) 1,051 426 (32) 1,445 394 99 (28) 465 108 (5) 568 464 586 877 65 24 – 89 259 – 348 62 5 – 67 22 – 89 3 22 – – – – 1,145 – 1,145 – – – – – – – – – Total £’000 998 265 (38) 1,225 1,954 (32) 3,147 515 111 (28) 598 139 (5) 732 483 627 259 1,145 2,415 At 31 May 2017, the net carrying amount of leased plant and machinery was £6,493 (2016: £9,437). There was no impairment during the year (2016: £nil). 29 Surface Transforms Plc Annual Report and Financial Statements 2017 29 Notes to the Financial Statements for the year ended 31 May 2017 10 Intangibles Cost At 31 May 2015 Additions At 31 May 2016 Additions Disposals At 31 May 2017 Depreciation At 31 May 2015 Charge for year Disposals At 31 May 2016 Charge for year Disposals At 31 May 2017 Net book value At 31 May 2015 At 31 May 2016 At 31 May 2017 11 Inventories Raw materials and consumables Work in progress Finished goods Software £’000 – – – 142 – 142 – – – – 6 – 6 – – Total £’000 – – – 142 – 142 – – – – 6 – 6 – – 136 136 2017 £’000 42 409 56 507 2016 £’000 47 408 115 570 Raw materials, consumables and changes in finished goods and work in progress recognised as cost of sales in the year amounted to £274,804 (2016: £607,009). There was no impairment during the year (2016: £nil). 12 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income All receivables fall due within one year. No debts were written off in the year (2016; £15,750). 2017 £’000 159 152 54 365 2016 £’000 346 173 420 939 30 Surface Transforms Plc Annual Report and Financial Statements 2017 30 Notes to the Financial Statements for the year ended 31 May 2017 13 Other interest-bearing loans and borrowings This note provides information about the contractual terms of the Company’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Company’s exposure to interest rate and foreign currency risk, see note 21. Current liabilities Finance lease liabilities Non-current liabilities Government grants Finance lease liabilities are payable as follows: 2017 £’000 12 352 Future minimum lease payments 2017 £’000 12 Present value of minimum lease payments 2017 £’000 Future minimum lease payments 2016 £’000 12 5 Interest 2017 £’000 – Interest 2016 £’000 1 Less than one year 14 Trade and other payables: amounts falling due within one year Trade payables Taxation and social security Accruals and deferred income 15 Deferred tax Difference between accumulated depreciation and amortisation and capital allowances Tax losses Unrecognised deferred tax asset The elements of the deferred taxation are as follows: 2017 £’000 444 61 180 685 2017 £’000 (17) (610) (627) 2016 £’000 4 16 Present value of minimum lease payments 2016 £’000 4 2016 £’000 761 28 147 936 2016 £’000 5 (1,046) (1,041) The Company has an unrecognised deferred tax asset at 31 May 2017 of £627,000 (2016: £1,041,000) relating principally to tax losses which the Company can offset against future taxable profits from the same trade. 31 Surface Transforms Plc Annual Report and Financial Statements 2017 31 Notes to the Financial Statements for the year ended 31 May 2017 16 Called up share capital Allotted, called up and fully paid 90,309,935 shares of £0.01 each (2016: 90,091,081 shares of £0.01 each) 2017 £’000 903 2016 £’000 901 During the year, 218,854 share options of £0.01 each were excercised for a consideration of £33,453. Further details of share options issued in the year can be found in note 24. The Company operates a share incentive scheme for the benefit of the Directors and certain employees. All options are granted at the discretion of the Board. The scheme grants options to purchase ordinary shares of £0.01 each. The options granted to Directors, date of grant and exercise price and exercise periods under the scheme are set out in the report on Directors’ remuneration on pages 12 and 13. In addition to the Directors’ share options, certain employees and former directors have been granted the following options: Date of grant 30/06/2008 22/09/2008 01/02/2010 15/02/2012 25/09/2014 30/09/2016 Number of unexpired share options 180,200 353,766 65,000 27,842 440,753 890,000 1,957,561 Exercise price £0.18 £0.19 £0.09 £0.12 £0.105 £0.145 Exercise period 30/06/11-30/06/18 22/09/11-22/09/18 01/03/13-01/03/20 15/03/15-15/03/22 25/09/17-25/09/24 25/09/18-25/09/25 There is a total of 1,484,355 unexpired options held by employees, 473,206 unexpired options held by former directors and a total of 2,594,707 unexpired options held by Directors. 17 Share premium and reserves At 31 May 2015 Retained loss for the year Share issue (net of expenses) Equity settled share based payment transactions At 31 May 2016 Retained loss for the year Share issue (net of expenses) Equity settled share based payment transactions At 31 May 2017 Share premium account £’000 9,186 – 5,173 – 14,359 – 31 – 14,390 Capital reserve £’000 Retained loss £’000 464 – – – 464 – – – 464 (8,983) (848) – 64 (9,767) (2,172) – 88 (11,851) 18 Pension scheme The Company contributes to specific employees’ personal pension schemes. The pension charge for the year represents contributions payable by the Company to the schemes and amounted to £24,496 (2016: £20,824). During the year one director and several senior managers opted to enter into salary exchange arrangements whereby they sacrificed salary for increased pension contributions. These arrangements accounted for £11,576 of the pension contributions (2016: £11,576). There were outstanding contributions of £7,250 (2016: £12,055) at the end of the financial year. 32 Surface Transforms Plc Annual Report and Financial Statements 2017 32 Notes to the Financial Statements for the year ended 31 May 2017 19 Related party disclosures Transactions with key management personnel Directors of the Company and their immediate relatives control 15.11% (2016; 15.09%) per cent of the voting shares of the Company. At present employees and Directors would hold 19.13% (2016; 18.14%) of the share capital, following the exercise of all outstanding share options. The company considers key management personnel as defined in IAS 24 “Related party disclosures” to be the Directors of the company and key senior manager personnel and their remuneration is as follows: Wages and salaries Social security costs Pension costs Share based payments Transactions in the year: Group 14 Limited Interest paid Fees paid 2017 £000 439 45 23 72 579 2017 £000 – 5 5 2016 £000 436 45 19 58 558 2016 £000 33 18 51 Due to the presence of a common Board Director, Group 14 Limited is a related party to Surface Transforms Plc. 20 Loss per ordinary share The calculation of basic loss per ordinary share is based on the loss for the financial year divided by the weighted average number of shares in issue during the year. Losses and number of shares used in the calculations of loss per ordinary share are set out below: Basic Loss after tax (£) Weighted average number of shares (No. of shares) Loss per share (pence) 2017 2016 (2,172,135) (848,724) 90,145,921 58,944,086 (2.41p) (1.44p) The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of options would have the effect of reducing the loss per ordinary share from continuing operations and is therefore anti-dilutive under the terms of IAS 33. 33 Surface Transforms Plc Annual Report and Financial Statements 2017 33 Notes to the Financial Statements for the year ended 31 May 2017 21 Financial instruments The Company’s policies with regard to financial instruments are set out within note 1. The risks arising from the Company’s financial assets and liabilities are set out below with the policies for their respective management. Currency Risk The Company transacts business in foreign currencies and therefore incurs some transaction risk. The Company’s exposure to foreign currency risk was as follows, this is based on the carrying amount for monetary financial instruments: 31 May 2017 31 May 2016 US Dollar £’000 Euro £’000 Sterling £’000 US Dollar £’000 Euro £’000 Sterling £’000 Cash and cash equivalents Trade receivables Trade payables Finance lease liabilities Net exposure 42 2 (24) – 20 US Dollar Euro 733 (12) (10) – 711 757 169 (410) (12) 504 Average Rate 27 42 (78) – (9) 17 3 (36) – (16) 4,733 301 (647) (4) 4,383 Reporting Date Spot Rate 2017 1.280 1.174 2016 1.508 1.368 2017 1.284 1.146 2016 1.462 1.296 Sensitivity Analysis A ten percent strengthening of the pound against the US Dollar and the Euro at 31 May 2017 would have decreased profit by the amounts below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2016. 31 May 2017 31 May 2016 US Dollar £’000 (1) (1) Euro £’000 (1) (1) A ten percent weakening of the pound against the US Dollar and the Euro at 31 May 2017 would have an equal and opposite effect to the amounts shown above, on the basis all other variables remain constant. Price Risk The Company aims to minimise its exposure to supplier price increases and customer price decreases by offsetting reciprocal supplier and customer arrangements. 34 Surface Transforms Plc Annual Report and Financial Statements 2017 34 Notes to the Financial Statements for the year ended 31 May 2017 21 Financial instruments continued Credit Risk The Company operates a closely monitored collection policy. The ageing of trade receivables at the reporting date was: Not past due Past due 0 to 30 days Past due 31 to 90 days Gross £’000 70 18 71 159 31 May 2017 Impairment £’000 – – – – Net £’000 70 18 71 159 Gross £’000 309 (10) 63 362 31 May 2016 Impairment £’000 – – (16) (16) Net £’000 309 (10) 47 346 There was an amount of nil (2016: £15,570) in the allowance for impairment in respect of trade receivables. The average debtor days are 42 days (2016: 97 days), the average creditor days are 210 days (2016: 185 days). Liquidity Risk The Company’s objective is to maintain a balance between continuity and flexibility of funding through the use of short term deposits. The contractual maturity of all cash and cash equivalents, trade and other receivables at the current and preceding balance sheet date is within one year. The contractual maturity of trade and other payables at the current and preceding balance sheet date is within three months. The contractual maturity of finance lease and loan liabilities can be found in note 13. Interest Rate Risk At the balance sheet date, the interest rate profile of the Company’s interest-bearing financial instruments was: Fixed rate instruments: Finance lease liabilities Fair values of the Company’s financial assets and liabilities The table below analyses the Company’s financial instruments: Financial assets: Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities: Trade and other payables Government grants Finance leases Total financial liabilities 2017 £’000 4 2017 £’000 1,532 365 1,897 685 352 12 1,049 2016 £’000 4 2016 £’000 4,777 939 5,716 936 – 4 940 35 Surface Transforms Plc Annual Report and Financial Statements 2017 35 Notes to the Financial Statements for the year ended 31 May 2017 21 Financial instruments continued Cash and cash equivalents The fair value of cash and cash equivalents is estimated as its carrying amount, all cash and cash equivalents are repayable on demand. Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Trade and other payables The fair value of trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. Capital management The Company manages its capital to ensure that it will be able to continue as a going concern and satisfy its debt as it falls due whilst also maximising opportunities to progress the development of the business. The capital structure of the Company consists of cash and cash equivalents and equity attributable to shareholders comprising issued capital. The key indicator of capital management performance used by management is the level of cash and cash equivalents available to the Company. 22 Commitments Non-cancellable operating lease rentals are payable as follows: Within one year In the second to fifth years inclusive Capital commitments as at 31 May 2017 were £nil (2016: £nil). Land and buildings 2017 £’000 135 575 710 Land and buildings 2016 £’000 41 – 41 23 Ultimate controlling party The Directors do not consider there to be an ultimate controlling party due to no individual party owning a majority share in the Company. 36 Surface Transforms Plc Annual Report and Financial Statements 2017 36 Notes to the Financial Statements for the year ended 31 May 2017 24 Share based payments Share Options The number of options outstanding under the Company’s share option scheme is as follows: Number of Share Options – Ordinary Shares at 1p At 31 May 2016 280,000 50,000 468,200 610,035 225,438 145,000 345,000 65,000 100,000 100,000 106,696 330,000 440,753 1,630,000 250,000 Note (a) (b) (a) (a) (b) (a) (b) (b) (b) (b) (a) (b) (a) (a) (b) Leaver Exercised Lapsed – – – – – – – – – – – – – (145,000) – (50,000) (50,000) – – – (45,000) – – – – (73,854) – – – – (230,000) – – – – – – – – – – – – – – At 31 May 2017 – – 468,200 610,035 225,438 100,000 345,000 65,000 100,000 100,000 32,842 330,000 440,753 1,485,000 250,000 Exercise price £0.21 £0.21 £0.18 £0.18 £0.19 £0.09 £0.09 £0.09 £0.09 £0.09 £0.12 £0.12 £0.105 £0.145 £0.155 Date from which exercisable 18/04/2010 18/04/2010 30/06/2011 22/09/2011 22/09/2011 01/03/2016 01/03/2016 17/10/2016 17/10/2016 17/10/2016 15/02/2016 15/02/2016 25/09/2017 30/09/2018 02/10/2018 Expiry date 18/04/2017 18/04/2017 30/06/2018 22/09/2018 22/09/2018 01/03/2020 01/03/2020 17/10/2021 17/10/2021 17/10/2021 15/03/2022 15/03/2022 25/09/2024 30/09/2025 02/10/2025 Total 5,146,122 (145,000) (218,854) (230,000) 4,552,268 (a) These options have been granted under the EMI approved scheme. There have been no variations to the terms and conditions or performance criteria attached to these share options during the financial year. There are no performance conditions attached to these shares other than continued employment by the Company. (b) These options have been granted under the unapproved scheme. There have been no variations to the terms and conditions or performance criteria attached to these share options during the financial year. There are no performance conditions attached to these shares other than continued employment by the Company. There was no cost payable by the employees on the grant of any of the above options. The option holder may only exercise their options during employment with the Company. 37 Surface Transforms Plc Annual Report and Financial Statements 2017 37 Notes to the Financial Statements for the year ended 31 May 2017 24 Share based payments continued The movements of the EMI and unapproved share options outstanding are shown below: Outstanding at 31 May 2015 Granted Forfeited & surrendered Outstanding at 31 May 2016 Lapsed Leaver Exercised Outstanding at 31 May 2017 Range of exercise prices EMI Scheme Unapproved Scheme Number of awards 2,050,684 1,880,000 (35,000) 3,895,684 (180,000) (145,000) (218,854) 3,351,830 9p to 21p Weighted average exercise price £ 0.135 0.146 0.09 0.135 0.21 0.145 0.09 0.083 Number of awards 1,250,438 – – 1,250,438 (50,000) – – 1,200,438 9p to 21p Weighted average exercise price £ 0.12 – – 0.12 0.21 – – 0.165 Weighted average remaining contractual life for the EMI Scheme is 8 years 4 months (2016: 9 years 4 months). Weighted average remaining contractual life for the unapproved Scheme is 5 years 8 months (2016: 6 years 8 months). There were 218,854 share options exercised during the year (2016 35,000). A charge of £87,677 (2016: £64,204) has been made in the statement of comprehensive income to spread the fair value of the options over the 3 year service obligations of those incentives. Assumptions used in the valuation of share based options In calculating the fair value of the share based payment arrangements the Company has used the Black Scholes method. Weighted average assumptions Fair value per share option Share price on date of grant Exercise price Share options granted in the year – EMI scheme Expected volatility Exercise pattern (years) Expected dividend yields Risk free rate of return 2017 2016 – – – – 100% 3-10 years uniformly 0% 2% 9.1p 14.5p 14.5p 1,880,000 100% 3-10 years uniformly 0% 2% The fair value of the share options is applied to the number of options that are expected to vest which considers the expected and actual forfeitures over the vesting period as a result of cessation of employment. Expected volatility was determined by assessing the Company’s historic data and the market in which the Company operates. 25 Post balance sheet event The Company successfully raised £3.68m (before fees) through equity placing and an open offer. 38 Surface Transforms Plc Annual Report and Financial Statements 2017 38 Company Information and Advisers for the year ended 31 May 2017 Website www.surfacetransforms.com Registered Number 03769702 Directors Company Secretary Address Nominated Adviser and Joint Broker Joint Broker Auditors Solicitors to the Company Bankers Registrars David George Bundred (Non-executive Chairman) Dr Kevin Johnson (Chief Executive) Kevin D’Silva (Non-executive Director) Richard Douglas Gledhill (Non-executive Director) David Charles Allen Image Business Park Acornfield Road Liverpool L33 7UF Tel: 0151 356 2141 Cantor Fitzgerald Europe One Churchill Place Canary Wharf London E14 5RB finnCap 60 New Broad Street London EC2M 1JJ RSM UK Audit LLP 20 Chapel Street Liverpool L3 9AG Gateley LLP Ship Canal House 98 King Street Manchester M3 4WU NatWest Chester Branch 33 Eastgate Street Chester CH1 1LG Capita Asset Services The Registry 34 Beckenham Road Kent BR3 4TU 39 Surface Transforms Plc Annual Report and Financial Statements 2017 39 Notice of Annual General Meeting for the year ended 31 May 2017 NOTICE IS HEREBY GIVEN that the annual general meeting of the above named Company will be held at finnCap, 60 New Broad Street, London, EC2M 1JJ on Tuesday 28 November 2017 at 11.00am for the following purposes: Ordinary Business 1. To receive the annual accounts of the Company for the financial year ended 31 May 2017 together with the last Directors’ report, the last Directors’ remuneration report and the auditors’ report on those accounts. 2. 3. To re-elect Kevin Johnson, who retires by rotation pursuant to article 113 of the articles of association of the Company and who, being eligible, offers himself for re-election as a Director. To re-appoint RSM UK Audit LLP as auditors for the Company to hold office from the conclusion of this meeting until the conclusion of the next annual general meeting of the Company and to authorise the Directors to fix their remuneration. Special Business To consider and, if thought fit, pass the following resolution which will be proposed as an ordinary resolution: 4. “THAT, in substitution for all existing and unexercised authorities and powers, the Directors of the Company be and they are hereby generally and unconditionally authorised for the purpose of section 551 of the Companies Act 2006 (the “Act”): l ● to exercise all or any of the powers of the Company to allot shares of the Company or to grant rights to subscribe for, or to convert any security into, shares of the Company (such shares and rights being altogether referred to as “Relevant Securities”) up to an aggregate nominal value of £301,003 to such persons at such times and generally on such terms and conditions as the Directors may determine (subject always to the articles of association of the Company); and further to allot equity securities (as defined in section 560 of the Act) up to an aggregate nominal value of £301,003 in connection with a rights issue or similar offer in favour of ordinary shareholders where the equity securities respectively attributable to the interests of all ordinary shareholders are proportionate (as nearly as may be) to the respective numbers of ordinary shares held by them subject only to such exclusions or other arrangements as the directors of the Company may consider appropriate to deal with fractional entitlements or legal and practical difficulties under the laws of, or the requirements of any recognised regulatory body in any territory, PROVIDED THAT this authority shall, unless previously renewed, varied or revoked by the Company in general meeting, expire at the conclusion of the next annual general meeting or on the date which is 6 months after the next accounting reference date of the Company (if earlier) save that the Directors of the Company may, before the expiry of such period, make an offer or agreement which would or might require relevant securities or equity securities (as the case may be) to be allotted after the expiry of such period and the Directors of the Company may allot relevant securities or equity securities (as the case may be) in pursuance of such offer or agreement as if the authority conferred hereby had not expired.” 40 Surface Transforms Plc Annual Report and Financial Statements 2017 40 Notice of Annual General Meeting for the year ended 31 May 2017 5. To consider and, if thought fit, pass the following resolution which will be proposed as a special resolution: “THAT, subject to and conditional upon the passing of the resolution numbered 4 in the notice convening the meeting at which this resolution was proposed and in substitution for all existing and unexercised authorities and powers, the Directors of the Company be and are hereby empowered pursuant to section 570 of the Act to allot equity securities (as defined in section 560 of the Act) pursuant to the authority conferred upon them by resolution 4 as if section 561 of the Act did not apply to any such allotment provided that this authority and power shall be limited to: (a) the allotment of equity securities in connection with a rights issue or similar offer in favour of ordinary shareholders where the equity securities respectively attributable to the interest of all ordinary shareholders are proportionate (as nearly as may be) to the respective numbers of ordinary shares held by them subject only to such exclusions or other arrangements as the Directors of the Company may consider appropriate to deal with fractional entitlements or legal and practical difficulties under the laws of, or the requirements of any recognised regulatory body in any, territory; and (b) the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal amount of £90,310, representing approximately 10% of the current issued share capital of the Company, and shall expire at the conclusion of the next annual general meeting or on the date which is 6 months after the next accounting reference date of the Company (if earlier) save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not expired.” BY ORDER OF THE BOARD David C Allen Company Secretary Date: 18 September 2017 Registered office: Image Business Park Acornfield Road Liverpool L33 7UF 41 Surface Transforms Plc Annual Report and Financial Statements 2017 41 Notice of Annual General Meeting for the year ended 31 May 2017 Notes: 1. A member of the Company entitled to attend and vote at the meeting convened by this notice is entitled to appoint one or more proxies to exercise any of his rights to attend, speak and vote at that meeting on his behalf. If a member appoints more than one proxy, each proxy must be entitled to exercise the rights attached to different shares. A proxy need not be a member of the Company. 2. 3. 4. 5. 6. A proxy may only be appointed using the procedures set out in these notes and the notes to the proxy form. To appoint a proxy, a member may complete, sign and date the enclosed proxy form and deposit it at the Company’s Registrars, Capita Asset Services at PXS, Beckenham, Kent BR3 4TU by 11.00am on 26 November 2017. Any power of attorney or any other authority under which the proxy form is signed (or a duly certified copy of such power or authority) must be enclosed with the proxy form. In order to revoke a proxy appointment, a member must sign and date a notice clearly stating his intention to revoke his proxy appointment and deposit it at the Company’s Registrars, Capita Asset Services at PXS, Beckenham, Kent BR3 4TU by 11.00am on 26 November 2017. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so in relation to the meeting, and any adjournment(s) of that meeting, by utilising the procedures described in the CREST Manual. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message must be transmitted so as to be received by the Company’s Agent, Capita Asset Services at PXS, Beckenham, Kent BR3 4TU (CREST Participant ID:RA10) by no later than 48 hours before the time of the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. Any corporation which is a member of the Company may authorise one or more persons (who need not be a member of the Company) to attend, speak and vote at the meeting as the representative of that corporation. The right to vote at the meeting shall be determined by reference to the register of members of the company. Only those persons whose names are entered on the register of members of the Company at entitlement time and date close of business on 26 November 2017 shall be entitled to attend and vote in respect of the number of shares registered in their names at that time. Changes to entries on the register of members after that time shall be disregarded in determining the rights of any person to attend and/or vote at the meeting. 42 Surface Transforms Plc 42 Notice of Annual General Meeting for the year ended 31 May 2017 Explanatory Notes: Resolution 4 – Directors’ power to allot relevant securities Under section 551 of the Act, relevant securities may only be issued with the consent of the shareholders, unless the shareholders pass a resolution generally authorising the directors to issue shares without further reference to the shareholders. This resolution authorises the general issue of shares up to an aggregate nominal value of £301,003, which is equal to 33.33% of the nominal value of the current ordinary share capital of the Company and a further issue of shares up to an aggregate nominal value of £301,003, which is equal to a further 33.33% of the nominal value of the current share capital of the Company for the purposes of fully pre-emptive rights issues. Such authorities will expire at the conclusion of the next annual general meeting of the Company or the date which is 6 months after the next accounting reference date of the Company (whichever is the earlier). Resolution 5 – Disapplication of pre-emption rights on equity issues for cash Section 561 of the Act requires that a company issuing shares for cash must first offer them to existing shareholders following a statutory procedure which, in the case of a rights issue, may prove to be both costly and cumbersome. This resolution excludes that statutory procedure as far as rights issues are concerned. It also enables the directors to allot shares up to an aggregate nominal value of £90,310 which is equal to 10% of the nominal value of the current ordinary share capital of the Company, subject to resolution 5 (b) being passed. The directors believe that the limited powers provided by this resolution will maintain a desirable degree of flexibility. Unless previously revoked or varied, the disapplication will expire on the conclusion of the next annual general meeting of the Company or on the date which is 15 months after the resolution being passed (whichever is the earlier). 43 Surface Transforms Plc Annual Report and Financial Statements 2017 43 Shareholder Notes for the year ended 31 May 2017 44 Surface Transforms Plc Printed by Michael Searle & Son Limited 44 Surface Transforms Plc Image Business Park Acornfield Road Liverpool L33 7UF Tel: 0151 356 2141